May 29, 2025
Understanding the Proposed Tax Legislation: A Cautionary Approach to Tax Planning
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Article Highlights:
- Key Provisions in the House Version
o Permanent Extension of the Increased Standard Deduction and Changes to Tax Rates
o Senior Bonus Deduction
o Adjustment to the Qualified Business Income Deduction (QBI)
o Estate and Gift Tax Exemption Enhancements
o Saver's Credit Adjustments
o “No” Tax on Social Security Income
o “No” Tax on Overtime
o “No” Tax on Tips
o Reinstatement of Bonus Depreciation
o Increased State and Local Tax (SALT) Deduction Limit
o Termination of Certain Deductions - Why Taxpayers Should Avoid Rushing Tax Planning
In recent months, legislative activity in the U.S. House of Representatives has spurred considerable discussion around the proposed Make American Families and Workers Thrive Again tax legislation. This article explores the key components of the House version of the tax bill as deciphered from the document "Description of The Budget Reconciliation Legislative Recommendations Related to Tax," and other sources, and highlights the importance of cautious tax planning given the potential changes in the legislation by the time it is reconciled with the Senate version.
Key Provisions in the House Version
The House of Representatives has proposed several changes aimed at extending and enhancing tax benefits introduced under the Tax Cuts and Jobs Act (TCJA), which was enacted in 2017. Most of the TCJA changes are scheduled to expire at the end of 2025. Here’s a summary of some key provisions:
- Permanent Extension of the Increased Standard Deduction and Changes to Tax Rates: The proposal seeks to make the standard deductions, which were increased under the TCJA, permanent. Furthermore, temporary enhancements are slated for 2025 through 2028, with an additional increase of $1,000 for individuals, $1,500 for heads of household, and $2,000 for married couples. The TCJA also temporarily modified the tax rates and brackets, including dropping the top rate from 39.6% to 37%, and indexed the bracket thresholds for inflation. The 2025 legislation makes permanent the TCJA’s income tax brackets and modifies the indexing methodology.
- Senior Bonus Deduction: Under current law, up to 85% of Social Security benefits could be taxable depending on the recipient’s other sources and amounts of income. The House bill aims to reduce the taxation of Social Security benefits for years 2025 through 2028 by providing those age 65 and older an additional $4,000 standard deduction amount, reduced when modified adjusted gross income exceeds $150,000 for married couples ($75,000 for others). Those who itemize deductions would also be eligible for a similar deduction.
- Adjustment to the Qualified Business Income Deduction (QBI): The bill proposes increasing the QBI deduction, sometimes referred to as the Sec 199A deduction, from 20% to 23% and making these changes permanent. The phase-in limitation mechanics are revised for simplification.
- Estate and Gift Tax Exemption Enhancements: The unified estate and gift tax exemption will see a permanent increase to an inflation-indexed $15 million.
- Child Tax Credit Modifications: Scheduled enhancements temporarily increase the child tax credit from $2,000 to $2,500 per qualifying child through 2028 before reverting to $2,000, starting in 2029. Additional modifications pertain to indexing, refundability, and Social Security number reporting.
- Saver's Credit Adjustments: Modifications to the Saver's Credit are geared towards encouraging more savings among lower- and middle-income families. The law establishes a permanent inclusion of contributions made to ABLE accounts for the beneficiary who is the account's designated recipient, effectively treating these contributions similarly to those made to more traditional retirement accounts.
- “No” Tax on Overtime: The legislation introduces a deduction for overtime premium pay, specifically for non-highly compensated employees under the Fair Labor Standards Act for the years 2025 through 2028.
- “No” Tax on Tips: The tax bill introduces a new above-the-line tax deduction for qualified tips received by individuals working in occupations where tipping is customary. The tips must be voluntarily given, not negotiated, and determined solely by the customer. The deduction applies to both employees and independent contractors provided the tips are received in eligible occupations as defined by the Treasury Department and Is not available to highly compensated individuals.
- Reinstatement of Bonus Depreciation: A full reinstatement of the 100% first-year depreciation deduction is proposed for business property placed in service between 2025 and 2030.
- Increased State and Local Tax (SALT) Deduction Limit: The House bill proposes increasing the SALT deduction limit from $10,000 to $40,000 for individuals making $500,000 or less. This expansion is substantial, as it can potentially aid numerous taxpayers previously limited by the TCJA's deduction cap.
- Termination of Certain Deductions: The deduction for personal exemptions is permanently repealed. The new law continues restrictions on miscellaneous itemized deductions.
There are more, but these are the key issues.
Why Taxpayers Should Avoid Rushing Tax Planning
While the proposed changes may appear attractive, it's crucial for taxpayers to refrain from making hasty tax decisions based solely on the House's proposal. Here are some reasons why:
- Legislative Uncertainty: The proposed tax bill is still under development, and significant differences exist between the House and Senate versions. Until the bill is reconciled and finalized, projections may vary significantly.
- Political Discrepancies: Within and between both political parties, there are multiple areas of disagreement. These include the extent of relief and the permanence of tax cuts, among others. Such differences imply that the current provisions could change dramatically.
- Potential Compromises: As negotiations progress, compromises might lead to the removal of certain elements or amendments that alter the practical implications of the legislation. It’s even possible that new provisions could be added to the mix.
- Long-term Planning Risks: Taxpayers might become exposed to risks if they alter their financial or tax strategies based on legislation that isn’t finalized. Making substantial decisions now could later lead to unfavorable tax liabilities once the law is fully enacted.
- Need for Personalized Analysis: Given the complexity and variability of tax situations, the generalized legislation might not fit every taxpayer’s needs. Specific provisions, such as adjustments to income brackets or estate planning, require detailed analysis tailored to individual circumstances.
Conclusion
While the House tax bill proposes noteworthy amendments aimed at boosting economic growth and offering tax relief, it is imperative for taxpayers and tax preparers to approach these prospective changes with caution. With the Senate still formulating its version and legislative negotiations looming, any immediate actions based on the current House bill could prove premature. Professionals engaged in tax planning should remain vigilant, keeping abreast of updates and awaiting a final, reconciled bill before making substantial tax planning decisions.
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